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N3 Cattle Ranch Property Livermore, CA ACWD Special Board Meeting October 17, 2019

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N3 Cattle Ranch Property Livermore, CA

ACWD Special Board Meeting October 17, 2019

Location

2

Property Summary

• Offered at $72M • 50,500 acres located in 4 counties over 80 sq. mi. area

– Santa Clara County: 19,935 +/- acres – Alameda County: 16,880 +/- acres – San Joaquin County: 9,095 +/- acres – Stanislaus County: 4,590 +/- acres

• 4 bedroom main residence, 14 hunting camps located throughout with cabins.

• Enrolled in Williamson Act - no conservation easements • Depending on rainfall, can accommodate “650 cow/calf pairs

year-round, 1,500 cow/calf pairs seasonally or 3,200 stockers seasonally”

• “200 miles of maintained roads”

3

N3 Cattle Ranch

4

N3 Cattle Ranch

5

N3 Cattle Ranch

6

ACWD Interests/Considerations

• Water Supply / Water Storage • Water Preservation / Water Quality • Environmental Mitigation or Protection • Potential Partners • Financial Considerations • Possible Next Steps

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ACWD Interests/Considerations

• Water Supply / Water Storage • Water Preservation / Water Quality • Environmental Mitigation or Protection • Potential Partners • Financial Considerations • Possible Next Steps

8

ACWD Interests/Considerations

• Water Supply / Water Storage – Property does not have substantial water

rights – Stockponds likely have very limited water rights. Any change

in the points of diversion, places of use or purposes of use of these rights would be subject to the “no injury” rule

– Any new reservoir upstream of either Del Valle Reservoir or Sunol Valley -- water rights would be junior in priority to ACWD’s and Zone 7’s water rights on Arroyo Valle and ACWD’s water rights on Alameda Creek

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ACWD Interests/Considerations

• Water Supply / Water Storage (cont.) – ACWD previously evaluated a new dam upstream of current

Del Valle Dam* and higher Lake Del Valle operations** • New dam

– Expensive w/limited water supply – Many other complicating issues – dropped from further

evaluation because of cost relative to other alternatives (e.g., Los Vaqueros Expansion)

• Higher Lake Del Valle Operations – Could inundate small area of N3 Ranch (<100 acres) – Requires new flood curves from USACOE – Impacts to EBRPD Facilities at Lake Del Valle

* CDM 2009 Study ** Ford 2018 Study

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ACWD Interests/Considerations

• Water Supply / Water Storage • Water Preservation / Water Quality • Environmental Mitigation or Protection • Financial Considerations • Potential Partners • Possible Next Steps

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ACWD Interests/Considerations

• Water Preservation / Water Quality – Property is located upstream of Lake Del Valle,

Calaveras Reservoir, and greater Alameda Creek watershed

– Rare opportunity to protect watershed – Rugged terrain - Future intensive development

unlikely • Unclear whether future development would impact

water quality more than current ranching operations • Lake Del Valle current allows powerboats

12

ACWD Interests/Considerations

• Water Supply / Water Storage • Water Preservation / Water Quality • Environmental Mitigation or Protection • Financial Considerations • Potential Partners • Possible Next Steps

13

ACWD Interests/Considerations

• Establishment of a Conservation or Mitigation Land Bank – Could offer the sponsoring public agency advance mitigation for

large projects or multiple years of operations and maintenance – Likely would require long-term maintenance guarantee in addition to

purchase price of property – Would encumber property – Significant additional O&M costs and staffing level increases to

maintain property (could be offset by revenue (e.g., grazing leases, but would still require ACWD oversight and management)

– Property would need to be ecologically evaluated for suitability for this purpose

– Potentially incompatible with other land uses (e.g., recreation)

14

ACWD Interests/Considerations

• Water Supply / Water Storage • Water Preservation / Water Quality • Environmental Mitigation or Protection • Potential Partners • Financial Considerations • Possible Next Steps

15

ACWD Interests/Considerations

• Potential Partners – Coalition being lead by the Nature Conservancy

and The Trust for Public Land • Could result in similar ACWD benefits at significantly

lower cost to ACWD ratepayers • ACWD has not yet seriously engaged with potential

partners – Timing risk?

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ACWD Interests/Considerations

• Water Supply / Water Storage • Water Preservation / Water Quality • Environmental Mitigation or Protection • Potential Partners • Financial Considerations • Possible Next Steps

17

N3 Ranch – Financial Considerations

• Financial Assumptions and Metrics at Budget and at the end of Fiscal Year 2018/19

• Current Debt and Future Refinancing Plans • Potential N3 Ranch Participation Scenarios • Considerations to Participate with No Rate

Impact • Other Financial Options • Financial Conclusions

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Budget Adoption Assumptions • $99.4 million General Fund balance at 6/30/19 • Pay-go Capital Improvement Program ( CIP) funding

except for a $14.5 million (50% of project costs) financing for Advanced Metering Infrastructure (AMI)

• Billed demand flat at 34.0 MGD ongoing • Delta Conveyance, Los Vaqueros Reservoir

Expansion, and Purified Water investments • Rate increase of 4% in 2020 (already adopted) and

planned increases of 3% annually thereafter • CIP costs decline beginning in FY 2025/26 • No change in District staffing level

19

Budget Adoption Metrics • General Fund balances and debt coverage ratios

$98 $99 $96 $95 $82 $68 $72 $69 $77

$0$20$40$60$80

$100$120

FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026

Mill

ions

General Fund Ending Balances

Ending Balances Underfund Balances Target Balances

683% 652% 674% 650% 664% 568% 565% 589% 577%

0%

200%

400%

600%

800%

FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026

Coverage Water Debt Coverage Ratios

Debt Coverage Ratio Target Debt Coverage - 200% Alert Coverage20

Budget Adoption Metrics • Capital Improvement Program

$27 $39 $36

$48 $42

$25 $33

$21 $24 $21

$0

$10

$20

$30

$40

$50

$60

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Mill

ions

CIP & Funding Sources

PayGo GF CIP Existing Debt GF CIP New Debt GF CIP FIF CIP GF CIP FRF CIP

21

FY 2018/19 Year-end Metrics Updates Since Budget Adoption • $107.4 million General Fund balance at 6/30/19

– Exceeds budget estimate by $8 million due to timing of CIP expenses ($6 million) and operating savings ($3 million) slightly offset by lower revenue ($1 million)

• Updated future revenue estimates based on actual meter count at 6/30/19 – adds about $250k in annual revenue

• Updated investment earning projections based on actual year-end fund balance and investment performance – adds about $200k in annual revenue

22

FY 2018/19 Year-end Metrics • Status Quo – Updated based on FY 2018/19 actuals

$107 $105 $104 $91 $79 $84 $81 $90 $97 $107

$0$20$40$60$80

$100$120

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

FY2025

FY2026

FY2027

FY2028

Mill

ions

General Fund Ending Balances

Ending Balances Underfund Balances Target Balances

676% 681% 658% 675% 581% 578% 603% 591% 602% 616%

0%

200%

400%

600%

800%

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

FY2025

FY2026

FY2027

FY2028

Coverage Water Debt Coverage Ratios

Debt Coverage Ratio Target Debt Coverage - 200% Alert Coverage23

Current Debt Profile

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Current and Planned Debt • Current Debt includes:

– 2009 bond series matures June 1, 2020 – 2012 bond series matures in 2041; can be refinanced on a

tax-exempt basis in 2022 – 2015 bond series matures in 2045; can be refinanced on a

tax-exempt basis in 2025 • Planned debt includes $14.5 million to finance half

the AMI project. The financial planning model includes $850,000 per year in debt service starting in FY 2020/21 for this

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Current and Planned Debt Estimated Savings from Refinancing1, 2 • 2012 bond series: annual savings of $230k • 2015 bond series: annual savings of $207k

No guarantee of State Revolving Fund (SRF) loan. AMI debt could be added to the 2012 bond series refinancing if needed. If that is necessary, higher interest costs for AMI financing would offset most of the anticipated savings from refinancing the 2012 bond series

1. Assumes current market conditions 2. Not included in financial planning model 26

Potential Debt Scenarios Debt Financing Assumptions • All scenarios assume the current asking price of $72

million will be the purchase price • Assumed 3.5% interest on District-issued debt per

advice from our financial advisor • Assumed 1.9% interest on SRF loans for AMI – this is

the current SRF interest rate – Prior costing at 4% interest as SRF loan was not assumed

• All scenarios initially presented with assumed rate increases, as needed, to fund debt service and achieve approximately the same ending General Fund reserve as the status quo

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Potential Debt Scenarios

Operating Costs • Potential operating costs could vary depending on

land use: – Leased as ranchland – Public recreation through partnership with East Bay Regional

Park District – Managed as a habitat mitigation land bank

• Leasing out some or all of the land for cattle grazing would generate modest income to partially offset operating costs

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Potential Debt Scenarios

Operating Costs • Potential operating costs could include:

– Taxes and insurance – Staffing to manage the land/oversee potential lessees –

estimated need of at least four additional staff – Habitat conservation – Maintenance of roads, buildings, fences, dams, and bridges – Wildland fire mitigation program – Property surveys – Security – Related administrative work

• Costs would vary based on level of effort, which would affect potential wildfire or other risks

• Outright purchase scenarios presented today assume $4 million in net annual operating costs starting in FY 2020/21. Assume $1 million share as part of a coalition

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Potential Debt Scenarios Potential Debt Scenarios for N3 Ranch Participation 1. Fully finance AMI. Allocate near-term cash flow improvement to District share of purchase as part of a coalition. Requires additional $10.7 million loan from SRF 2. Fully finance AMI and issue bonds to make sufficient funds available for outright purchase. Requires additional SRF loan and $61.3 million bond issuance 3. Fully finance AMI and issue bonds to 1) make sufficient funds available for outright purchase, and 2) have bond funds available for existing CIP projects to smooth impact of new debt service payments. Requires additional SRF loan and $72 million bond issuance

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Scenario 1 – Full AMI Loan Participate in N3 Ranch Coalition

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$107 $105 $84 $79 $74 $79 $76 $85 $91 $102

$0

$20

$40

$60

$80

$100

$120

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Mill

ions

General Fund Ending Balances

Ending Balances Underfund Balances Target Balances

676% 681% 694% 680%

555% 554% 578% 567% 577% 591%

0%100%200%300%400%500%600%700%800%

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Coverage Water Debt Coverage Ratios

Debt Coverage Ratio Target Debt Coverage - 200% Alert Coverage

Scenario 1 – Full AMI Loan Participate in N3 Ranch Coalition

• Increase SRF loan amount by $10.7 million and use near-term cash flow improvement to fund participation in N3 Ranch coalition

• Increase in AMI annual debt payment from $856k to $1,131k

• Add $1 million in operating costs • Rate increases of 4% in 2021, 3% in 2022, and 3% in

2023 – this is 1% more than currently planned • Debt coverage stays above 500%

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Scenario 2 – Ranch Purchase Full AMI Loan and Debt Issuance

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$107 $90 $78 $71 $67 $73 $73 $84 $93 $107

$0

$20

$40

$60

$80

$100

$120

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Mill

ions

General Fund Ending Balances

Ending Balances Underfund Balances Target Balances

676%

442% 417% 447% 404% 419% 437% 432% 441% 453%

0%100%200%300%400%500%600%700%800%

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Coverage Water Debt Coverage Ratios

Debt Coverage Ratio Target Debt Coverage - 200% Alert Coverage

Scenario 2 – Ranch Purchase Full AMI Loan and Debt Issuance • Increase SRF loan amount by $10.7 million and add

$61.3 million to District-bonded debt for outright N3 Ranch purchase

• Increase in annual debt service of $3.7 million • Add $4 million to annual operating costs • Rate increases of 6% in 2021, 6% in 2022, and 5% in

2023 – this is 8% more than currently planned • Lowers debt coverage to about 400%

– 200% required by policy – 125% required by bond covenant

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Scenario 3 – Ranch Purchase Full AMI Loan and Full Debt Issuance

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$107 $101 $88 $80 $74 $79 $76 $86 $93 $104

$0

$20

$40

$60

$80

$100

$120

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Mill

ions

General Fund Ending Balances

Ending Balances Underfund Balances Target Balances

676%

418% 395% 418% 371% 385% 400% 395% 403% 413%

0%100%200%300%400%500%600%700%800%

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Coverage Water Debt Coverage Ratios

Debt Coverage Ratio Target Debt Coverage - 200% Alert Coverage

• Increase SRF loan amount by $10.7 million and add $72 million to District-bonded debt for outright N3 Ranch purchase

• Increase in annual debt service of $4.3 million • Increase in annual operating costs of $4 millions • Rate increases of 6% in 2021, 5% in 2022, and 5% in 2023 –

this is 7% more than currently planned • Lowers debt coverage to just below 400%

– 200% required by policy – 125% required by bond covenant

• Rate increase is slightly less than Scenario 2 because full AMI and Ranch financing provides stronger initial cash flow.

• Evaluate long-term approach to use of debt for CIP

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Scenario 3 – Ranch Purchase Full AMI Loan and Full Debt Issuance

No Rate-impact Considerations

• Potential considerations to fund N3 Ranch debt service without a rate increase and limited impact to financial capacity: – Water System Reoperation – sell some SFPUC supply

guarantee to reduce purchase costs. Would reduce current water supply and increase the hardness target

– Reduce CIP spending – current modest main renewal program is the most significant recurring line item. Could increase system maintenance needs

– Reduce advance funding payments for pension/OPEB liabilities (range from $4.5 million - $6.6 million per year through FY 2031/32). Actuary estimates $45 million reduction in total payments from accelerating 20-year to a 15-year schedule

– Take a less conservative approach to financial planning • Each option has meaningful drawbacks and in some

cases might be perceived as reversing previous commitments to the community

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No Rate-impact Considerations • Financial plan is intentionally conservative:

– Assumes full O&M and capital spending each year – Assumes water demand will stay flat indefinitely (modest

increases assumed in water supply planning) – Assumes full participation in Delta Conveyance and Los

Vaqueros Expansion projects – Treats reserve target as a minimum and the District

traditionally maintains a reserve balance above the target even in the lowest projected year

• A more aggressive financial plan could 1) increase rate volatility, and/or 2) increase reliance on debt – A stated outcome of District Strategic Plan Goal 3 – Improve

the District’s Financial Stability and Transparency – is no unexpected or over-sized rate increases

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No Rate-impact Scenarios • Scenario 3a shows the financial results if the ranch is

purchased if no rate adjustment is made and no reductions in other programs are made either

• Scenario 3b achieves the targeted reserve balance by the end of the evaluation period and: – Allows interim balances below the target reserve – Reduces operating and capital costs for established

programs by $3.5 million

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Scenario 3a – Ranch Purchase Full AMI Loan and Full Debt Issuance

$107 $101 $87 $74 $61 $56 $44 $43 $40 $40

$2.6 $8.4 $21.5 $23.8 $28.4 $29.8

$0

$20

$40

$60

$80

$100

$120

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Mill

ions

General Fund Ending Balances

Ending Balances Underfund Balances Target Balances

676%

418% 380% 373% 302% 297% 308% 297% 300% 306%

0%100%200%300%400%500%600%700%800%

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Coverage Water Debt Coverage Ratios

Debt Coverage Ratio Target Debt Coverage - 200% Alert Coverage

• Increase SRF loan amount by $10.7 million and add $72 million to District-bonded debt for outright N3 Ranch purchase

• Increase in annual debt service of $4.3 million • Increase in annual operating costs of $4 million • No rate increase • Lowers debt coverage to about 300% • CIP costs decline in FY 2025/26 and that mitigates

annual deficits, but CIP decline is insufficient to replenish reserves

• General Fund ending balance is about $67 million lower in FY 2027/28, and falls $30 million below policy target

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Scenario 3a – Ranch Purchase Full AMI Loan and Full Debt Issuance

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Scenario 3b – Ranch Purchase Full AMI Loan and Full Debt Issuance

$107 $101 $87 $78 $68 $68 $60 $63 $65 $70

$5.8 $3.6 $3.6 $0.1

$0

$20

$40

$60

$80

$100

$120

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Mill

ions

General Fund Ending Balances

Ending Balances Underfund Balances Target Balances

676%

418% 380% 409% 338% 335% 348% 340% 345% 352%

0%100%200%300%400%500%600%700%800%

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028

Coverage Water Debt Coverage Ratios

Debt Coverage Ratio Target Debt Coverage - 200% Alert Coverage

• Increase SRF loan amount by $10.7 million and add $72 million to District-bonded debt for outright N3 Ranch purchase

• No rate increase • Increase in annual debt service of $4.3 million • Increase operating costs for land management by $4 million

annually, but identify $3.5 million in savings from a combination of water system reoperation, reductions to the CIP, and lower advanced funding payments for pension/OPEB liabilities

• Lowers debt coverage to about 350% • General Fund ending balance is about $37 million lower in FY

2027/28, but stays at minimum • Reserve balance goes below policy target in several years • Significant uncertainty with finances that far into the future – may

determine a need for a rate increase or additional savings at a later time

• Evaluate long-term approach to use of debt for CIP

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Scenario 3b – Ranch Purchase Full AMI Loan and Full Debt Issuance

Other Financial Options • At the May 2019 Budget Workshop, the Board discussed

the following potential uses of available funds should financial performance exceed budget: – Maintaining reserves above target to protect against the potential

financial impact of cost and water demand uncertainties and unknown future capital program needs

– Not issuing debt for AMI to maximize the District’s debt capacity – Additional payments for pension/OPEB liabilities – Ramping up the District’s main renewal program – Mitigating future rate increases

• California Government Code does not list real estate as a permissible financial investment of reserve funds. Purchase must be justified on the basis of advancing the District’s core mission

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Financial Conclusions • The District has the financial capacity to participate in

a coalition or outright purchase the N3 Cattle Ranch: – Outright purchase may 1) result in rate increases of up to

eight additional percent, and 2) lead the District to reevaluate its CIP financing approach

– Doing so with a rate increase will limit the effect on the District’s current level of financial capacity and will maintain commitments to water quality, system reliability, and benefit obligations

– Doing so without a rate increase is feasible, but 1) will reduce the District’s financial capacity, 2) create more volatility with future rate increases, and 3) may affect established programs

– Participation will compete with other District financial priorities

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Possible Next Steps

• Staff to collect more information and report back to the Board

• Begin negotiations with either property owners or coalition – Future Board Action Required to Appoint

Negotiators • Continue Monitoring • Other?

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